In: Accounting
A company purchased a patent on January 1, 2018, for $2,500,000.
The patent's legal life is 20 years but the company estimates that
the patent's useful life will only be 5 years from the date of
acquisition. On June 30, 2018, the company paid legal costs of
$135,000 in successfully defending the patent in an infringement
suit.
Prepare the journal entry to amortize the patent at year end on
December 31, 2018. (If no entry is required, select "No
Entry" for the account titles and enter 0 for the amounts. Credit
account titles are automatically indented when the amount is
entered. Do not indent manually.)
A patent is to be amortised over it's legal life or useful life, whichever is life. In the above case, useful life of 5 years is lower than its legal life of 20 years, so the patent will be amortised over it's usefule life of 5 years.
Further, legal costs incurred in successfully defending the patent in an infringement suit are to be capitalised to patent costs. If the company is unsuccessful in defending the suit the costs would be charged to expense. Since the company successfully defended the lawsuit, hence legal costs would be capitalised and added to the cost of the patent.
Therefore , total amount to be amoritsed over 5 years = 2,500,000 + 135,000
= 2,635,000
Amount to be amortised every year = 2,635,000 / 5
= 527,000
Journal entry for amortisation will be as under:
Date | Account | Debit | Credit |
Dec 31, 2018 | Amortization Expense | 527,000 | |
Accumulated Amortization | 527,000 | ||
(To record amortisation of patent) |